MNE with ongoing operational losses: automatic tax adjustments and construed solely on a presumptive basis are forbidden
The Regional Tax Commission of Lombardy (judgment 928/20/2019) comes back to the issue of companies that are in permanent loss. In the case at stake, the Italian company belonging to a multinational group operating in the pharmaceutical sector, had recorded operating losses beyond the start-up period (from FY1997 to FY2013), while at the consolidated level the Group showed a positive operating margin.
According to the Italian Tax Authority, this “physiological” operating deficit would have constituted the evidence of certain intercompany services (marketing) carried out by the Italian entity in favour of the Group – not compensated – thus determining the underlying amount presumptively (i.e. amount equal to the operating loss).
The taxpayer had, on the other hand, widely documented the genesis of these results, attributing them to the difficulty of competing with larger groups, as well as to government policies linked to the forced reduction in drugs prices.
The OECD guidelines on transfer prices (OECD – TPG), while they admit that a “systematic” loss-making company may not receive an adequate remuneration for the functions it performs in favor of the Group, on the other hand, they warn that only following the “accurate delineation of the transaction” can this assertion be confirmed or denied, since no automatism or presumption can be applied.
Moreover, the OECD – TPG in paragraph 1.132 specifically provides that the arm’s length price must be subject to adjustments in case of government policies such as “price controls” or “price cuts”.
Therefore, the Regional Tax Commission, correctly applying the OECD – TPG in the present case, confirmed the judgment of the Tax Court, believing that the intragroup service pretended by the Office lacked evidence and was construed only on a presumptive basis.